Bloomberg News

Record $21 Billion Pouring Into Bond Market: Mexico Credit

June 02, 2011

June 2 (Bloomberg) -- A rally in the Mexican peso and inflation near a five-year low are luring a record amount of foreign investment into the country’s bond market.

International investors bought $21 billion of Mexican debt denominated in pesos in the six months through March, the most since the central bank began compiling the data in the 1960s. Local debt returned 10.3 percent this year in dollar terms, compared with gains of 9.9 percent in Brazil and 3.5 percent in China, according to Bank of America Merrill Lynch indexes. Indian bonds returned 0.6 percent during the period.

Mexico has let the peso rally a record 9 percent in the past year while developing nations from Brazil to South Korea have taken measures to limit gains in their currencies and shore up exports. Yields on Mexico’s benchmark peso bonds due in 2024 sank 81 basis points since the end of March to a five-month low of 7.03 percent yesterday as the country’s economy grows without fueling a surge in consumer prices, according to Banco Santander SA.

“One of the reasons why foreign investors are coming is the currency,” Guillermo Rodriguez, who helps manage $5.5 billion at Corp. Actinver SAB, said in a telephone interview in Mexico City. “There are still a substantial amount of foreign flows coming in. There is still a lot of room for the peso to appreciate.”

Overseas investment in Mexico’s bond market more than doubled in the last three months of 2010 to $10.9 billion, the central bank said. Foreigners bought another $10.5 billion worth of the securities in the January-through-March period.

‘Very Comfortable’

President Felipe Calderon said in a May 10 interview in New York that he’s “very comfortable” with the gains in the peso. Brazilian Finance Minister Guido Mantega, who said in September that countries were weakening their exchange rates to bolster economic growth in a global “currency war,” has increased taxes on foreign investors’ purchases of local debt to reduce the amount of dollars coming into the country.

Mexico’s economy, Latin America’s second-biggest after Brazil’s, may grow as much as 5 percent this year after a 5.4 percent expansion in 2010 that was the fastest in a decade, according to the central bank. Annual inflation eased to 3.3 percent in mid-May from 4.4 percent in 2010 and touched a five- year low of 3.04 percent in March. In Brazil, inflation has quickened to 6.51 percent, the fastest in six years.

“The large portfolio investments in Mexico are mainly drawn by its solid economic growth and low inflation,” Nader Nazmi, a senior analyst at BNP Paribas in New York, said in a telephone interview.

No Rate Increase

Mexico is the only major Latin American country that hasn’t raised rates in the past year. Policy makers held the benchmark rate at a record low 4.5 percent last month. Brazil increased borrowing costs 125 basis points this year to 12 percent while India has raised its benchmark repurchase rate 100 basis points to 7.25 percent. China has increased reserve requirements for banks 11 times and boosted interest rates since the start of 2010 to cool inflation.

Mexico is luring more foreign investors after its local debt was added to Citigroup Inc.’s World Government Bond Index in October, said Octavio Lara, deputy general director of public debt at Mexico’s Finance Ministry. The peso’s appreciation is playing an “important role” for investors seeking higher- yields, he said.

“This widens the base of investors and creates a permanent presence of foreign investors in these bonds,” Lara said in a telephone interview from Mexico City. “We are seeing a diversification of places where foreign investors are putting their money to work.”

‘Biggest Risk’

A slowdown in the U.S. economy may curb that investment by crimping Mexico’s expansion, according to Michael Roche, an emerging-market strategist at MF Global in New York.

The U.S. economy, which buys about 80 percent of Mexican exports, expanded at a 1.8 percent annual rate in the first quarter, less than the 2.2 percent median forecast in a Bloomberg News survey and down from 3.1 percent in the last three months of 2010.

More Americans than forecast filed applications for unemployment benefits last week, signaling the job market is weakening as employers trim staff to cut costs. Jobless claims fell to 422,000 last week, exceeding the 417,000 average estimate of economists surveyed by Bloomberg.

Manufacturing in the U.S. expanded at the slowest pace in more than a year, The Institute for Supply Management said yesterday. The Standard & Poor’s 500 Index fell for the second day, having lost 2.3 percent yesterday, the most since August.

“The biggest risk to a withdrawal of the capital would be the U.S. domestic economic slowdown,” Roche said in a telephone interview.

Rate Differential

The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries narrowed nine basis points to 138 at 5 p.m. New York time, according to JPMorgan Chase & Co.

The peso rose 0.7 percent to 11.6320 per U.S. dollar.

The cost to protect Mexican debt against non-payment for five years was little changed at 104 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Yields on TIIE interest-rate futures contracts maturing in December was unchanged at 5.01 percent, indicating traders expect the central bank will boost its benchmark rate by that month. Traders see a 33.3 percent chance that the Federal Reserve will boost the U.S. overnight rate target of between zero and 0.25 percent at its January meeting, interest-rate futures show.

The interest-rate differential between the two countries will keep attracting investors to Mexico’s debt market, said Ram Bala Chandran, a Latin American currency and rates analyst at Citigroup.

“The inflows will pretty much continue,” Bala Chandran said in a telephone interview from New York.

--Editors: Lester Pimentel, David Papadopoulos

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net; Andres R. Martinez in Mexico City at amartinez28@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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